Welcome to the April 2017 newsletter from Chamberlains
Strange times we’re living in. Public promises are broken (definitely no UK election until 2020), Budget provisions are reversed (National Insurance rises – see below), turkeys vote for Christmas (Corbyn: of course we want an election now!), not to mention unsettling events further afield. Most of us (perhaps especially business people) want some stability, despite clamours for change. We want to be able to plan for the future with some confidence that our walkway isn’t going to be tugged one way or another from under our feet.
Be that as it may, not all change is bad: we at Chamberlains have been enjoying the new opportunities brought by my new (as from January) partner, Chris Lowry.
Changes in the Budget
The early election means that Parliament hasn’t had time to bring some of the Budget and other plans into law – so there have been a few useful reprieves (even if only temporary):
- Quarterly tax returns (“Making Tax Digital”) have been shelved for the moment. They were due to come in this time next year – but we probably haven’t seen the last of them
- Probate fees will stay at £215 rather than being based on the value of the estate. They were due to go up to £20,000 for estates of more than £2million.
- Tax-free dividends were due to fall to £2,000 from £5,000 from next April – but this is likely to still apply.
I got to thinking about National Insurance last month, after its abortive mention in the Budget. We pay less NI than Income Tax, so accountants spend more time helping with the latter. However, it’s a confusing area, but more or less relevant to most of us, so we can’t ignore it. It can be argued that it’s really just another tax – so why not combine it with Income Tax so that it’s clear what we’re paying? This was once a LibDem policy, but nowadays no major politician dares to seriously suggest it: to add it to Income Tax would increase the headline tax percentage – an unwelcome transparency!
It wouldn’t be impossible to combine it with Income Tax, but it would be complicated. There are various types of NI, and some bring rights that are not given by paying plain tax. Some people think if it as National Health Insurance – but it has little to do with the National Health Service – most NHS funding comes from general taxation and you can get health care without paying NI. Similarly, only about half of Social security expenditure is funded by NI – the rest comes from general taxes. However, certain benefits are dependent upon having made NI contributions.
Types of contributions
Class 1: via payroll for employees. “Primary” contributions are paid by employees, and “secondary” are paid by employers (“Employers’ NI”)
Class 1A: similar to Class 1, but for taxable benefits for employees (eg. cars or BUPA)
Class 2: flat rate, paid by self-employed people. (To be abolished from April 2018)
Class 3: flat rate, paid voluntarily to qualify for certain long-term benefits.
Class 4: payable by self-employed earners
Amounts payable are quite complicated. For Class 1 there are three earnings levels to remember:
Lower earnings limit – £5,876 yearly
Primary threshold – £8,164 yearly
Upper earning limit – £45,000
As an employee, you don’t pay any NI until you get to £8,164, but from £5,876 upwards you’re deemed to have paid enough to protect contributory benefit entitlements! (A neat trick, but a payroll has to be operated to show that this has happened, so not everyone bothers.)
From £8,164 to £45,000 you pay NI at 12%, more than half the 20% basic rate of income tax, but after £45,000 you just pay 2% – so this is a tax that benefits the better-off – known as a “regressive” tax. (Income tax is “progressive”, because higher earners pay more.)
Employers pay a hefty 13.8% on everything above £8,164.
Self-employed people pay Class 4 NI – 9% on profits between £8,164 and £45,000 and 2% thereafter. It was due to rise by 1% in 2018 and again in 2019, but this was dropped after strenuous protests in the media.
Social Security benefits – some depend on previous payments of NI; others are based on other factors – residence, level of income, age, etc. The major ones are:
|Non-contributory benefits||Contributory benefits (NI dependent)|
|Housing benefit||Basic State Retirement Pension|
|Jobseeker’s Allowance (income-based)||Jobseeker’s Allowance (contributions-based)|
|Disability Living Allowance||Incapacity benefit|
|Pension credit & Income support||Maternity allowance|
|Council tax benefit||Bereavement benefits|
|Attendance allowance||Widow’s pension|
|Child benefit and Child tax credit|
That’s quite enough for NI this month –I may let you have more next time!